Assets or Stocks?

Assets or Stocks?

Article excerpt

If ever there was an opportunity to say, "...if I had only...," or perhaps your favorite is, "woud coulda, should," it is after you have sold or merged your business.

If I could have done anything differently when I merged my company with a development firm and took stock in the to-be-formed public company, it would have been: Sub-S corporation structure. That act alone would have saved a fortune in taxes. Isn't hindsight wonderful? The structure of the business-sale transaction is all important. For at no other point in the deal-after everything has been decided-can a mistake hurt you so badly. It is at this juncture that the attorneys earn their fees. For the unwary, this is the point at which you need to test the assertions of the other party against the formal documents that will govern the conduct of the transaction to and beyond its conclusion.

This article will give you food for thought on structuring one of the most important deals of your life. Of course, as in all things, rely upon your legal and accounting advisors to help you make the final decisions.

Asset or Stock Sale

There are advantages and disadvantages to both types of sale. In an asset sale, the buyer purchases the company outright for cash, stock, debt, or a combination of these. The name "asset sale" is a little misleading because it seems to imply that the liabilities of the business are not a part of the transaction. Such is not the case. With the possible exception of liability for actions taken by management just prior to, or "in contemplation of" the sale, a buyer assumes the normal liabilities of the business. This is, of course, subject to whatever indemnifications and warranties are negotiated in the transaction.

As the name implies, a stock sale involves the purchase of a majority interest in a company's stock. Stock sales are generally much easier to structure than asset sales because the legal entity remains unchanged. However, stock must usually be bought for cash, so any financing must be arranged outside of the sale. Figure 1 summarizes some of the advantages and disadvantages of each transaction from the buyer's perspective.

In an asset-sale transaction, the purchase price is allocated to the various net assets with any remainder carried over to "goodwill." In other words, the purchase priceafter having been negotiated and agreed to-is allocated to the various assets on the balance sheet. Obviously, cash cannot be "marked-up," but all other assets are raised to their full market value. If the purchase price still exceeds the combined market value of all assets, the surplus is allocated to goodwill. Goodwill is then amortized by the surviving company over a set period.

Another major advantage for the buyer purchasing property as an asset is that the transaction enables the buyer to "write up" assets to fair market value. This gives the surviving entity a much higher basis to depreciate against pre-tax cash flows. This type of acquisition is particularly beneficial to real estate companies that have real properties on their balance sheets because it gives those assets a stepped-up basis and a higher write-off of depreciation and amortization of certain costs. However, when assets are nondepreciable, such as land, this step-up in basis may be of limited value.

How much you will realize for the asset-sale of your business also depends on the structure of your current company. …